JACKSONVILLE — The exposed brick walls and floor-to-ceiling concrete columns inside the former public defender’s office in Downtown Jacksonville have the leadership at Gordon’s Castle LLC, a Jacksonville general contractor, envisioning the property renovated into apartments with an urban vibe.

The company has devised a plan that it says would be profitable for an investor: Buying the building and converting it into 45 apartments for a total of $4.5 million, or about $100,000 per apartment.

Apartment development in the urban core would likely have the city’s support, as a majority of the nominees to the newly created Downtown Investment Authority have identified increasing the Downtown residential base as a catalyst for bringing more life to the city streets. The problem: Finding investors who are willing to do smaller projects, which tend to be less efficient and less profitable than large-scale developments.

With the city’s apartment market obviously in a development cycle — 11 projects have been announced since the beginning of the year, with several under construction — and a renewed focus on Downtown revitalization, converting the old office building at 25 Market St. into apartments seems like a natural fit.

“It is profitable,” said David Miller, director of development and project management for Gordon’s Castle. “But it may not be as profitable as, say, a new 300-unit complex in a prime area of town.”

In 2011, there were 2,365 residential units in Downtown Jacksonville, according to data from Downtown Vision Inc., and about 3,266 people living in those units. Those figures account for apartments and condominiums on both the Northbank and the Southbank, which, according to DVI, were about 90 percent occupied in 2011.

Residents wanted

A rule of thumb in Downtown development is that the number of people living there should be equal to at least 10 percent of the employment base, said Don Shea, executive director of the Jacksonville Civic Council and a DIA nominee. Shea is also a public policy adviser to the city, specializing in Downtown development.

There are about 51,000 employees working Downtown, according to DVI’s data, meaning the residential population needs to grow by at least 2,000 people or more than 1,000 units.

“If you do that over a short period of time, it tends to create its own buzz,” Shea said.

Much of the opportunity for apartment development in Downtown Jacksonville is renovating old buildings, such as the public defender’s office, or land parcels that would lend themselves to high-rise construction, said Batey McGraw, an apartment land broker at Walchle Lear Multifamily Advisors in Jacksonville Beach.

“I believe if you could build a garden-style apartment on the Southbank, somebody would be building it, but you can’t,” McGraw said. “You have to build mid- or high-rise type product, which is more expensive and therefore requires a higher rent, and additionally, there even is a lack of sites that would afford a developer the opportunity to do a mid-rise development in areas that are attractive and secure.”

Small projects, large challenges

The other issue, McGraw said, is the return on a developer’s investment in smaller projects.

“From a developer’s point of view, there’s more money to be made in a 200-unit deal than a 45-unit deal,” he said. “Yet the effort required may not be proportionate — in other words, it’s not four times as hard to do 200 units versus 50 units, yet the financial gain is four times as good.”

The challenges of redeveloping old buildings into apartments were illustrated by The Carling and 11 East Forsyth, two apartment buildings in the Northbank core. Those projects were financed by city-held mortgages. In late 2009, the developer of those buildings, The Vestcor Cos., sought modifications of the city of Jacksonville-held mortgage loans on the 11E and The Carling apartment buildings. The City Council granted the company’s request to make interest-only payments for three years on the city loans and to increase the first mortgage to cover tenant improvement for the commercial space in both properties.

Representatives of The Vestcor Cos. did not return calls requesting comment.

Downtown Orlando has seen several successful apartment developments in the past five to 10 years, said Shelton Granade, an executive vice president in capital markets for CBRE Group Inc. (NYSE: CBRE) in Orlando.

The Orlando approach

Granade said finding equity investors for those deals hasn’t been an issue; rents are higher in the central business district than anywhere else in the Orlando metro area. But equity isn’t attracted to small redevelopment deals.

“All the successful deals we’ve seen here, for instance, have been more scrape and ground-up construction versus retrofitting an office space or some other type of use,” Granade said. “It’s tough to retrofit some of those buildings, and the parking needs to be there. Trying to retrofit an office space or an old hotel, it’s just that the cost generally goes up quite a bit.”

There are investors who are interested in projects like the public defender’s office, Granade said, but it’s a very different investor from one who might back a large-scale suburban apartment complex on the Southside.

“When you get down below 150 or 100 units in an urban setting, it’s less likely to be institutional investors and more likely to be private capital,” he said. “The demand is still definitely there if they’re well-located. It’s a different buyer profile, a different type of money.”

Ashley covers real estate for the Tampa Bay Business Journal.

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